Why the banks should be hoarding their TARP money

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I’ve been bothered for a while by all the criticism of the banks for “hoarding” the $300+ billion we taxpayers have given them rather than lending it right back out again. But I haven’t been able to articulate the counterargument. Happily Jack “The Mortgage Professor” Guttentag has at least partially done it for me. An excerpt:

The purpose of the investment was not to provide the means for the firm to make more loans but to avoid the firm’s failure and the devastating consequences of failure for the economy. The investment increased the firm’s capital, which strengthened its ability to meet future losses and hopefully restored the confidence of its creditors. …

In other cases, the need is not imminent but may arise in the future, probably when some debts come due. Many if not most financial firms are under-capitalized by the standards of today’s harsh economic environment. A capital infusion from the government gives them a safety margin going forward….

The justification for the capital infusions is that it [sic] will increase capital, not loans. The goal is to avoid future shocks arising from the failure of under-capitalized firms. The fundamental purpose is to prevent the crisis from getting worse. Other measures are needed for a cure.

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